Funds withdrawn from an inherited Roth IRA are generally tax-exempt if they are considered qualified distributions. This means that the money has been in the account for at least five years, including when the original account holder was alive. If you transfer the money to an inherited IRA, you can spread out the tax bill, albeit for a shorter period of time than the law had previously allowed. An annual distribution of, say, one-tenth the amount of the IRA would likely minimize the impact on
your tax bill.
However, since the new rules don’t require annual payouts, you have some flexibility. If you’re planning to retire in a few years and expect your tax bracket to fall, it may make sense to postpone withdrawing withdrawals until you’re no longer working, says Howard Hook, a certified financial planner at EKS Associates in Princeton, New Jersey. Another option is to go up to 10. year to wait to withdraw the money, which would defer you a decade for tax purposes. On the other hand, withdrawing all the money at the same time could result in a tax bill that breaks the limits
.
The IRA RMD rules for beneficiaries state that you must make the required minimum distributions from the inherited IRA account. Excluding an inherited IRA is another option if you want to avoid paying taxes on an inherited IRA or want the proceeds passed on to other beneficiaries. Finally, if you’re the beneficiary of an inherited IRA from a non-spouse, you don’t have bankruptcy protection with your inherited IRA. The beneficiary of an IRA can set up the inherited IRA account and then make the required minimum distributions
according to a life expectancy table.
SEP IRAs and simple IRAs become traditional inherited IRAs after account holders die and follow the same rules. If you inherit an IRA from a parent or have an inherited IRA from a non-spouse, you can’t simply transfer the money to your own IRA. IRA transfer rules allow you to request a trustee to trustee transfer to your inherited IRA account so that you can be tax-deferred on the money for an extended period. One strategy for IRA owners is to shift their balance from before tax to after tax by making a so-called Roth IRA conversion and paying taxes on contributions and income
.
Spousal beneficiaries have the option to transfer the inherited Roth IRA to a Roth IRA account in their own name. If you are named as a beneficiary and inherit an IRA from a parent or have inherited an IRA from a spouse, you should request a transfer of funds in the inherited account from trustee to trustee. Remember that under IRA distribution rules, the beneficiary named on the beneficiary name form receives the IRA’s proceeds. When you open your IRA account, you can use the Beneficiary Name Form to name a beneficiary in accordance with
IRA Beneficiary Rules. The
rules for owning and contributing to a Roth IRA are different from those for a traditional IRA or 401 (k) plan. One important factor to consider if you want to minimize taxes on an inherited IRA or minimize taxes on an inherited 401 (k) is mixing up the inherited IRAs. If you learn that you inherit an IRA and want to either avoid inherited IRA taxes or pass on the assets to other beneficiaries instead, you have the option to decline an inherited IRA. The IRA’s custodian should be able to transfer the funds to separate IRAs that the siblings have set up with themselves as
beneficiaries..
